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CORPORATIONS - Dividends - Rectification of records - Powers of the court

Thursday, December 12, 2019 @ 6:30 AM  

Lexis Advance® Quicklaw®
Appeal by Canada from an order rectifying a directors’ resolution declaring a dividend from the capital dividend account of respondent corporation. The respondent paid out a dividend in late 2015 in an amount calculated so that the entire dividend would be paid from its notional capital dividend account and would therefore be received by its shareholders tax-free. Later, it learned that the calculation had been mistaken due to an accountant’s error and that its capital dividend account would not be as high until after the corporation’s year-end in 2016. Canada assessed the corporation for a penalty equal to 60 per cent of the amount overpaid. The corporation obtained an order rectifying the resolution by which its directors had declared the dividend, such that the correct amount of its capital dividend account would be substituted for the original figure. In the chambers judge’s analysis, the directors’ resolution clearly established that the essence of the agreement here was always to make a distribution to shareholders in the maximum amount that could be distributed without tax. The only flaw in the resolution was in the figure, which had been provided by an expert third party. Canada argued that rectification was recently restricted by the Supreme Court of Canada such that the remedy was precluded where the parties’ goal was to realize a favourable tax result and that alternative remedies were available.

HELD: Appeal dismissed. The finding by the chambers judge that the directors’ agreement was clear and definite throughout to pay the dividend from the company’s capital dividend account whatever it might be clearly came within the conditions for rectification set by the Supreme Court of Canada. The respondent sought to change the written document to accomplish the directors’ original intention to pay a dividend entirely out of the respondent’s capital dividend account and thus pass the amount thereof to shareholders tax-free. The chambers judge made no error in his finding that the risks, delay and expense of the alternative remedies relied on by Canada were clearly outweighed by the factors favouring rectification. There was no evidence to suggest that the respondent was so large and profitable that it could afford these alternatives. Rectification was the appropriate and reasonable remedy.

5551928 Manitoba Ltd. (Re), [2019] B.C.J. No. 2042, British Columbia Court of Appeal, D.M. Smith, D.C. Harris and G.B. Butler JJ.A., October 30, 2019. Digest No. TLD-December92019010